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How can capital structure decisions affect the control of a firm? In other words, would the control issues impact your decisions on how to raise money for your company? +300 words, citation in text is APA
Capital structure decisions can greatly affect the control of a firm. Generally, there are two primary ways to raise money for a company: debt and equity. Each method has different implications in terms of controlling ownership within the organization.
Debt financing allows organizations to acquire capital without giving up an ownership stake in the business. This may be appealing for those interested in maintaining control or avoiding potential conflicts with shareholders. When new debt is issued, it does not dilute existing owners’ stakes, so their voting power remains unaffected (Aristeguieta & Sekhposyan, 2016). However, taking on additional debt requires lenders to have some assurance that they will eventually be repaid; this often comes in the form of collateral or personal guarantees from majority owners (Aristeguieta & Sekhposyan, 2016). These arrangements could potentially limit owners’ access to funds and reduce their discretion over how they manage their businesses.
Equity financing allows companies to issue stocks or other securities in order to raise capital without incurring debts (Gulati et al., 2018). The key benefit of equity financing is that it provides access to larger sums than would typically be available through traditional loans (Gulati et al., 2018). Additionally, since stockholders purchase shares directly from the company itself rather than lending money as creditors do, firms do not need security agreements or any other type of assurance that payments will be made when issuing equity (Gulati et al., 2018). Another advantage is that issuing new shares does not require board approval like borrowing does; however, this also means that founders may lose a significant amount of control depending on how much equity is offered and who purchases it (Gulati et al., 2018).
When considering raising money for a company, control issues should certainly factor into decisions about which capital structure option—debt versus equity—to pursue. While debt financing offers more protection against dilution for existing owners due its lack of direct ownership involvement compared with equity issuance methods such as Initial Public Offerings (IPOs), its restrictive conditions could create difficulties down the line due to limitations on decision-making ability imposed by lenders. Equity financing meanwhile offers greater financial flexibility but at a cost: founders must be prepared to surrender some degree of control if they choose this route. Ultimately then choosing between these two options depends largely on one’s goal—minimizing risk while preserving autonomy versus leveraging available resources while relinquishing certain powers—and careful assessment should always be applied before making any definitive choices regarding capital structure solutions.(300 words)
References:
Aristeguieta L., & Sekhposyan T. P. (2016). Capital Structure Decisions: A Review*. Annual Review Of Financial Economics , 8(1), 143-163 10p http://dx DOI/org/10 DOI 10 1146/annurev-financial-111514 155937 Gulati S., Castro C., Mannan M .M .S .H .K .I .P , Jain U K • Rameshbabu B N • Ramya•Ramakrishnan G P • Rao V F • Teng W H I U RAN E D Q Yuriyanty I B K Y N X II O S M E A D S D V G O L Y P U U B E R T RA T E L P R O J EC TN A S H K AN GULATI•CASTRO•MANNAN•JAIN•RAMESHBABU•RAMYA•RAMAKRISHNAN·RAO·TENG·YURIYANTY© 2021 BY THE ANNUAL REVIEW OF FINANCIAL ECONOMICS All rights reserved 0066–4308/2021/814–03$20 0